The UK’s Prudential Regulation Authority (PRA) has launched a consultation on a significant package of reforms to the Matching Adjustment (MA), which aims to improve the flexibility for life insurers to make more productive, long-term investments in the UK economy while supporting safety and soundness and policyholder protection.
The proposals cover reforms to MA regulations relating to greater investment flexibility and revised eligibility rules and more flexibility in MA processes, along with risk management enhancements, a greater role for senior manager responsibility including through attestations, and certain changes to MA calculation and reporting.
These proposals, the PRA said, fit in with the wider reforms announced by the government in November 2022, and give clarity on the Authority’s intended approach.
The proposed reforms are expected to improve insurers’ investment flexibility by enabling broader and quicker investments by insurers in their MA investment portfolios, while supporting the PRA in holding insurers to account for managing the additional risks involved, through a range of proportionate supervisory measures.
The PRA said that the reforms, working with upcoming legislation, will “facilitate greater investment freedom by insurers to increase their investments in productive finance”, from 2024 onwards.
Sam Woods, the deputy governor for prudential regulation, said: “We propose to adjust regulations to reflect the decisions made by the government about the level of financial resilience that should be required of insurance companies. These proposals aim to promote policyholder protection while enabling the annuity sector to meet its commitments to the government to increase investment in the UK economy.”
The Authority noted that the reforms to the rules on long-term insurance products like annuities are designed to improve business flexibility by widening the range of investments and insurance products that can benefit from the advantages of applying the MA.
The reforms should also be more responsive to the level of risk by streamlining the PRA’s processes for simpler and lower risk investments and making more proportionate the consequences of accidental breaches of the MA rules, and by increasing the sensitivity of the rules to levels of credit risk.
The PRA also said the reforms would enhance insurance firms’ responsibility for risk management through high level controls such as an attestation from senior management that they understand and are taking appropriate account of the risks in their investments and the level of MA benefit they are applying.
Michael Abramson, partner and risk transfer specialist at Hymans Robertson, said the PRA’s consultation “puts meat on the bones of this flexibility, although insurers may feel that the meat is rather lean”.
He explained: “The PRA proposals set out which types of assets would newly be eligible, along with a limit of such assets such that they cannot provide more than 10% of the portfolio benefit and various other restrictions. However, with nearly £300bn of assets held in matching adjustment portfolios overall and plenty of demand for bulk annuities, this could provide a modest boost to certain sectors over time.”
Abramson said that some pension schemes considering an insurance buy-out would have hoped that these asset freedoms would allow insurers to take on their illiquid assets.
”There may be some instances where the proposals would facilitate this, but given the various limitations, it will be no panacea,” he said.
The MA reforms are expected to be finalised and implemented by 30 June 2024, subject to consultation responses and the government’s legislative timetable. The consultation period closes on Friday 5 January 2024.
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